Incentives for Industrial R&D in China

Reforms of china’s science and technology (S&T) system focused on ensuring that the S&T development keeps pace with economic reform. By the 1990’s, the China’s industrial policy for the hi-tech sector was to make a technological progress and improved workforce quality the keystone of economic development. There was, therefore, a great emphasis on the commercialization of research results. The early 90s saw the implementation of four important plans:

These plans aimed to encourage collaborations between universities, research institutes and the hi-tech enterprises, and implementation of which began in 1992. 

Combined private and public spending on R&D in China as a percentage of GDP has grown from 0.6 percent in 1996 to 1.29 percent in 2002. This is still far below 2.7 percent of GDP spent in the U.S. But it still positions China as the world's third-largest investor in R&D, after the U.S. and Japan, when measured in purchasing-power parity dollars, according to the U.S. National Science Foundation. To meet the growing demand for a scientific workforce, universities are expanding slots for those studying science and engineering. Ministry of Education has announced that it will almost quadruple the number of universities it would give the financial support needed to enhance to world-class scientific status from the previously designated 10. 

Starting in 1985 China set out to create a more competitive, merit-driven system that would respond to market needs. The country turned the applied research labs affiliated with the various ministries into enterprises that have to turn discoveries into marketable products or find corporate sponsors for their research. Basic research has been confined to the top universities and the Chinese Academy of Sciences - a network of 85 institutes spread around the country. Research funding and promotions are assesed on a researcher's output of scientific papers and patents.

The size and quality of this scientific workforce have been key factors in attracting multinational R&D centers to China. There are more than 600 R&D laboratories affiliated with non-Chinese multinationals in China, according to China's National Research Center for Science and Technology for Development. Motorola, Siemens, IBM, Intel, General Electric and Nokia all have major R&D operations in China. Most of this R&D is really development, tailoring products to the needs of the local market. But a few centers have a broader mandate.  

There are two main aspects to China’s industrial policy vis-ŕ-vis foreign investment in the hi-tech sector, namely, regulation and incentives. The Chinese government utilizes industrial, regional development policy and incentive measures to encourage foreign investment. 

The Laws of People’s Republic of China on Sino-foreign Contractual Joint Ventures, and the Law of People’s Republic of China on wholly Foreign-owned Enterprises, along with the implementation measures for these laws, are the main instruments governing foreign investment in China. The provisions of the law divide industries into four categories, namely,   those where foreign investment is encouraged; those where it is allowed; those where it is restricted; and those where it is forbidden. 

 The industry in which foreign investment is encouraged is loosely defined and could possibly include most of the investments. These include new agricultural technologies, general agricultural development, and resources, transportation and important raw materials projects; high technological technology projects; foreign exchange earning export projects; general resource utilization and recycling projects, and pollution prevention projects; and projects that will help regions in central and west China to leverage their respective advantages. 

Chinese government has incentivized the R&D in industries by providing tax concessions, duty exemptions, and investment limits. The following are some of the specific measures adopted by the government to encourage the R&D in industries: 

Value-added Tax: Until 2010 value-added tax will be levied on the software industry and the semiconductor industry at the official rate of 17 percent. In the software industry, that part of the tax burden exceeding 3 percent will be refunded immediately. 

In the case of semiconductor industry, that part of the tax burden exceeding 6 percent will be refunded.                  

Enterprise income tax: Companies in the software industry will be able to benefit from special tax breaks on enterprise income tax; these include a two-year exemption followed by a 50 percent reduction for three years. 

Customs duty and import circulation tax: There is an exclusion list of products which are not eligible for exemption. All equipment imported by software companies for their own use and all technology (including software), accessories and parts imported along with such equipment is exempted from import duty and import circulation tax. As for the semiconductor industry, those companies investing over RMB8 billion or establishing a factory with production process technology of 0.25 micron or less can benefit from import duty and import circulation tax exemptions. 

Export permits and depreciation: All software companies exporting more than US$1 million worth of software per annum shall have the right to export their own products independently. In addition, the minimum period for depreciation of production equipment belonging to companies producing integrated circuits has been set at three years. 

Apart from the national policy, several regions of the country have their own incentives for R&D, in certain cases it percolates down to certain cities having their own offerings as incentives. Some of these are as follows: 

Regional Policy 

The Chinese government is continuing to encourage the development of capital and technology –intensive and export-oriented industries in East China by leveraging this region’s existing ability to attract foreign investment.  At the same time, however the government is also adopting measures to encourage foreign investment in central and west China. Some of the main policies that have been adopted include the following:

  1. Special Projects: In the case of industries and investment projects where the middle and western regions enjoy a clear advantage.

  1. Project relating to restricted categories of investment and restrictions on foreign shareholding: Basically, investment projects in East china are required to conform to the stipulations of the Catalogue of Key Industries, Products and Technologies, whereas the government is prepared to relax the restrictions on enterprise establishment and market opening in the case of investment projects in central and west China.

  1. Tax incentives: During the period 2001-2010,enterprise income tax in central and west China will be collected at a rate of 15 percent. With the approval o f the provincial government, foreign-invested enterprises can be exempted from local income tax, or have it collected at a reduced rate.

The Chinese government has implemented a low taxation policy with respect to foreign- invested enterprises, with special incentives for investment in industries and regions to which the government attaches particular importance.            

Foreign-invested enterprises in West and Central China: Companies investing in business areas that the government is seeking to promote as their main business area (where revenue from this business area accounts for more than 70 percent of the enterprise’s total operating revenue in the year in question) can, with the approval of the tax authorities, have enterprise income tax collected at the 15 percent rate. Furthermore, this 50 percent reduction continues for three years after the expiry of the regular five-year exemption and remission period. 

Business period: Technology transfer by foreign enterprises and foreign-invested enterprises is exempted from business tax. 

Value -added tax: Where a company purchases domestically-produced equipment, if the equivalent imported equipment falls under the category of products that are exempt from import duty, the value-added tax paid an the domestically-produced equipment will be refunded in full. 

Customs duty and import circulation tax: Where equipment is imported as part of foreign investment projects in sectors whose development the government is seeking to encourage, these imports may be exempted from import duty and import circulation tax. 

Individual income tax: The individual income tax payable on the wages by foreign employees is reduced by a half, for the foreign-invested enterprises operating in China. 

Individual provinces and municipalities often provide incentives even more attractive than those granted by the central government  

Thus, incentives in China on R&D are aimed at foreign companies, which engage in R&D. There is a competing list of exemptions at central, regional and local levels. The policy seems to aim at getting the local science and engineering graduates into R&D mode. In this China is aiming at building the social capital, which could help change in mindset and yield benefits in the later years for the country. 

References: